In-School Payment Options

By Mark Kantrowitz

Lenders of private student loans offer as many as four in-school
payment options: immediate repayment, interest-only repayment, fixed
repayment and full deferment.

Most student loans allow the borrower to defer payments of principal
and interest until after the student graduates or drops below
half-time enrollment status. Often, there is a 6-month grace period
before repayment begins. The interest that is charged during the
in-school and grace periods will be capitalized (added to the loan
balance) if it is not paid as it accrues.

But, if the borrower can afford to make loan payments during the
in-school and/or grace periods, it will prevent the loan balance from
growing much larger than the original loan amount, reducing the cost
of the loan.

Federal and private student loans do not have prepayment
penalties. So, nothing stops a borrower from making payments during
the in-school and grace periods. To facilitate this, some lenders
offer several in-school payment options. Some lenders will even reduce
the interest rate for borrowers who commit to making in-school
payments.

Immediate Repayment. Under immediate repayment, the
borrower begins making full principal and interest payments during the
in-school and grace periods, soon after the loan is fully
disbursed.

Interest-Only Repayment. Under interest-only repayment,
the borrower makes interest-only payments during the in-school and
grace periods, followed by fully amortized payments of principal and
interest when the loan enters the repayment period.

Fixed Repayment. Under fixed repayment, sometimes called
flat repayment, the borrower makes a fixed monthly payment, typically
$25 per loan per month, followed by fully amortized payments of
principal and interest when the loan enters the repayment period.

Full Deferment. Under full deferment, the borrower does
not make any payments during the in-school and grace period. Interest
continues to accrue and, if unpaid, is capitalized (added to the loan
balance). The borrower begins making fully amortized payments of
principal and interest when the loan enters the repayment period.